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Workers' Compensation Insurance Experience Rating and Subsequent Employer Claims: The Wisconsin Experience

Michael M. Barth, Robert W. Klein and Gregory Krohm
Journal of Insurance Issues
Vol. 31, No. 1 (SPRING 2008), pp. 16-42
Stable URL: http://www.jstor.org/stable/41946280
Page Count: 27
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Since scans are not currently available to screen readers, please contact JSTOR User Support for access. We'll provide a PDF copy for your screen reader.
Workers' Compensation Insurance Experience Rating and Subsequent Employer Claims: The Wisconsin Experience
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Abstract

This paper examines the effect of changes in employers' experience rating modifications on their subsequent lost-time claims for workers' compensation insurance. Our research is motivated by significant interest in the impact of experience rating on employers' incentives and efforts to make workplace safety improvements to reduce worker injuries and workers' compensation claims. Previous research related to this topic tends to support the hypothesis that pricing incentives improve safety and reduce injuries, but there are number of limitations to this research and most workers' compensation experts believe that more empirical evidence is needed. Our study uses data on individual employer claims experience—the first time that data at this disaggregated, micro level has been examined—to further explore this research question. Our examination of individual firms' workers' compensation lost-time claim experience provides further support for the contention that experience rating has the intended effect of improving safety and reducing worker injuries and claims. More specifically, our analysis yields supporting evidence of an ex post pricing effect—increases in employers' experience modifications are associated with decreases in the number of their lost-time claims in subsequent years. We also find that the number of claims tends to increase with employer size as measured by its covered payroll, but the rate of increase declines as an employer's payroll grows. This is consistent with the proposition that there are economies of scale associated with the returns from employer investments in safety.

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